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How Much Longer Will Indian Oil Demand Slump?

Merely a month ago India was perceived as one of the main potential winners of the oil price slump – with Middle Eastern differentials dropping beyond any reasonable level, its refiners were bound to print money with its massive downstream capacities. Now India is on the brink of becoming one of the key contributors to the price weakness. Local hydrocarbon production is ailing as oil is still to surpass the breakeven cost of Indian output that currently hovers around $35-37 per barrel. India’s downstream is struggling to stay relevant with the government-mandated lockdown that has minimized demand for refined products and compounded refiners’ access to labor with the nationwide movement restrictions.

The coronavirus-induced lockdown, in place since March 24 and recently prolonged until May 03, will inevitably decimate the economic results of Q2 2020 and drop the annual GDP growth rate by some 3-4% to slightly more than 1%. Despite fears that the densely populated cities of India might be ideal hotspots for drastic contamination growth, the Modi-led Indian government has sought to alleviate the economic pain for the poorest, for them the mandated lockdown will have ended from April 20 onwards. With harvesting season coming to India, the country would have an immensely difficult time were it not relaxing lockdown conditions – Modi’s government is well aware of the fact that the money Indian farmers garner from their harvest provides a financial lifeline for months to come.

India is a net oil importer, therefore the massive drop in oil prices is not necessarily bad news for Indian refineries, yet it is but a small drop in a general ocean of problems. Gasoline is the predominant fuel for passenger transportation, accounting for approximately 60% of national fuel demand, whilst diesel dominates in industrial usage – both types of fuel are expected to decrease by 30-40% in Q2 2020, due to the travel restrictions and depressed industrial activity, respectively. Fuel demand would have fallen much more steeply if Prime Minister were not to exempt farming and industrial activity from the second phase of lockdown, down by some 65-70% compared to last year’s April-May demand levels. Jet fuel is the only product category that is destined to plummet – most analysts expect a roughly 90% year-on-year plunge.

Talking of refinery economics, diesel cracks will most probably remain positive throughout the lockdown, which cannot be said about gasoline cracks that might eventually get negative for the whole of Q2 2020. Refinery runs seem to be down by some 1.5mbpd (a bit less than quarter of the nominal 5.2mbpd throughput), creating a whole array of challenges for Delhi. The combination of low prices and robust market contango has compelled Indian authorities to reroute all crude barrels that might have gotten stuck in Indian ports amid slumping refinery demand for crude. The first and perhaps most immediate challenge is to get rid of all crude deliveries bought in January-February and scheduled to arrive in April/May. Reliance has reportedly sought to resell Murban and al-Shaheen cargoes arriving this April.

As one might have expected, reselling cargoes amid hyper-depressed demand is by no means an easy task, further complicated by the fact that Indian legislation bans export of crude oil, i.e. Indian refiners are compelled to resell whilst the cargo is still at sea, reloading from Indian ports is not an option. With the above in mind, strategic stocks are a viable way out. India has a total of 39 million barrels in strategic petroleum reserves capacity (SPR) – of this, 18.3 MMbbls are at the Padur site, whilst Mangalore and Vishakhapatnam boast 11 and 9.7 MMbbls of capacity, respectively. There is still room to store within India’s SPR sites as some 16-17 MMbbls are still available. With remarkably buyer-friendly market prices and an ongoing robust contango, the Indian government has specifically asked state-owned refiners – specifically Bharat Petroleum, MRPL and IOC - to fill SPR capacities.

The UAE national oil company ADNOC has been leasing half of Mangalore SPR storage capacities, coming in very handy as almost all of Fujairah storage for crude and products is filled. The Indian backstop is indeed working as last weekend has already seen one Upper Zakum cargo delivered to Mangalore (instead of the initially set discharge port of Chennai where only one of the local refinery’s crude columns is working). The other storage sites contain Iraqi Basrah Light and Saudi Arab Medium, attesting to the fact that India continues to overwhelmingly depend on Middle Eastern nations for its crude imports (see Graph 1).

Maximizing the usage of strategic reserves is part of the solution to the coronavirus conundrum, yet by no means would it suffice. Due to the sudden plunge in Q2 India’s crude demand will decline in 2020, the only remaining question is the extent thereof. This means less government revenue coming in from product sales - the Modi government is cognizant of the missing revenues and has raised the excise duty on both gasoline and diesel by 3 INR per liter. Yet petrochemical demand remains relatively weak – GAIL already announced that it had shut down its 400kt per annum PE plant in Uttar Pradesh, among others – therefore India lacks an industry segment that might pioneer the way out of the demand slump.

The first weeks after the lockdown assuagement will provide a clearer picture of what to expect – for instance, were the automotive industry to restart properly in May-June, petrochemicals might see a palpable boost in demand. If the government’s actions do manage to stabilize the economy by June, the demand drop will be limited to 100kbpd this year, only to turn back to the growth trajectory in 2021. A genuine balancing act, getting the lockdown easing right offers prospects of great profits - if India manages to get its refineries back on track, it only stands to benefit from the depressed pricing environment. Were the average crude import price for 2020 average around 30 per barrel, the refiners’ import bill would effectively halve to some $50 billion.

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